| | - It was said that the boom in the UK economy in the 1980s and 90s was fuelled by debt. It is true that many people can’t understand why they should save up for something rather than just “put it on the plastic.” The public are bombarded with offers of credit cards, personal loans and charge cards from high street store or even supermarkets.
- For a time, getting credit never seemed to have been easier, the economy looked good, jobs were plentiful and the good times looked to be here to stay. Many people were seduced into making the minimum payments required to service their debts instead of paying them off. For the credit cards, the APR (annual percentage rate or interest, in this case, calculated on a monthly basis) is applied to the uncleared balance, so you could find yourself owing more, month after month - even if you made no new purchases on the card!
- Many people carry several different credit and store cards (just take a peek in your wallet!) and may have loans or overdrafts for a variety of reasons: new car, holiday, wedding plans etc. Almost certainly, the APR (annual percentage rate or interest) charged on these different credit sources will be markedly different. Calculating the cost of these is very easy; just multiply the debt by the APR. If you owe £3000 at an APR of 21.6%, you will be paying £634.80 per year to service your debt. Do this for each of your credit cards and add the total up to get the true picture of what your borrowing is costing you. Once you’ve done this, rank your financial arrangements in order of cost. Now is the time to see if a debt consolidation loan is worth considering.
- Debt consolidation loans are typically available from £5000 upwards. They can be obtained both as secured or unsecured loans. In contrast to an unsecured loan, a secured loan can only be obtained from a financial institution by a borrower if they have some form of collateral. A secured loan is perceived by lenders as being a lower risk transaction than its unsecured counterpart since the borrower agrees to guarantee the repayments by putting their assets at risk if the payment schedule is not respected.
- A secured loan can be for amounts up to £100000 (if you have sufficient collateral) and can be for a longer repayment period than would be typical for an unsecured loan. Suitable forms of collateral would include assets such as your home, jewellery, artwork, antiques or other forms of investment such as stocks and shares. The collateral offered must be sufficiently valuable to cover the amount of the loan, so the assets offered by the borrower may need to be independently valued, depending on the exact circumstances and the amounts of money involved. As the risk to the lender is higher, an unsecured loan is usually more expensive than a secured loan.
- The idea behind a debt consolidation loan is that you use the money to clear all (or at least the most expensive) of your other sources of borrowing. If the APR on the consolidated loan is less than that for the debts you intend to clear then you will save money by taking out a debt consolidation loan. A debt consolidation loan does not reduce the amount that you owe to your creditors, but it does reduce the costs of servicing your debt. Consequently, a debt consolidation loan can be a very valuable tool to help you get your finances under control.
- Remember, if you have some debt with a lower APR than that being charged for the debt consolidation loan, for example a student loan which is pegged to the UK inflation rate, don’t clear it. As with any financial service, and particularly in these days of global downturn, it is always a good idea to shop around to find the best debt consolidation loan you can find.
- Using a debt consolidation loan on your outstanding debts can relieve the financial pressure you might find yourself under and enable you to maintain or rebuild your credit rating. A large number of financially astute consumers are taking a more proactive role in their financial management by consolidating their debts to minimize interest payments - a trend that is becoming more popular, such as remortgaging to achieve a lower interest rate. This trend is only likely to increase as recession bites in the UK.
- Of course, you don’t have to be in dire financial straits before a debt consolidation loan can help you. It would be prudent for even the most comfortably of amongst us to check to see if a debt consolidation loan would make a significant reduction in monthly expenditure – to coin a phrase: Why pay more?
|
|
